Looking On The Bright Side

After A Dreary 2000, Growth Investors Think This Year Will Be Their Time To Shine Again

January 30, 2001|By Josh Friedman, Los Angeles Times.

After two spectacular years, "growth" stocks suffered a deep dive in 2000, thanks largely to the technology sector's crash.

But investors who worry that the death knell has sounded for growth investing should ask themselves a simple question, growth's adherents say: Why would the market permanently turn its back on the companies posting the fastest sales and earnings growth?

Since stock prices ultimately follow earnings, it's only natural that investors should be attracted, long-term, to the most vibrant sectors of the economy, which is why growth stocks always command premium prices.

What last year demonstrated, of course, is that growth investors can push their stocks' prices to extreme premiums relative to earnings and other valuation measures. The penalty for overdoing it can be severe, as the "dot-com" bust showed.

Yet even as tech shares plunged, gains in other kinds of growth stocks last year reminded investors that growth is wherever you find it. Specialty staffing firms, medical device makers, restaurant chains and even up-and-coming young energy companies were among the non-tech growth sectors that produced winners last year.

While large-stock growth mutual funds fell 14.1 percent, on average, in 2000, declines in growth funds that target smaller shares were more muted. The average mid-cap stock fund, for example, lost 6.9 percent for the year.

And if Federal Reserve cuts interest rates again this week, growth-stock fans note that many growth sectors have done well historically against a backdrop of falling rates.

Even so, it's true that growth-stock investing can take a back seat to "value" investing for extended periods.

Academic studies have argued that value investing beats growth in the very long run. In the 70-year span from 1930 through 1999, value stocks produced an average annual gain of 13.5 percent, compared to 10.3 percent for growth stocks, according to Ibbotson Associates, a Chicago research firm.

In the '90s, however, growth stocks dominated, returning an annualized 19.6 percent compared to 14.7 percent for value stocks. But the two sectors repeatedly traded performance leads: While growth stocks rocketed in 1998 and 1999, they underperformed value stocks in 1996 and 1997.

Because the market's style tilt can change abruptly, many financial advisers say investors should simply always hold both growth and value stocks in a well-diversified portfolio.

And if you follow the "buy low, sell high" philosophy, the best time to buy growth funds should be when they're out of favor.

Growth-oriented money managers say there are plenty of good pickings in this market, but they stress that investors should be finicky and patient: The fierce price momentum that propelled tech stocks in 1999 and early 2000 is unlikely to return soon, and concerns over high stock price-to-earnings ratios appears to be back in the center of the investing public's collective conscious.

Still, for investors who can take a longer-term view, and with many growth stocks down sharply from their 2000 peaks, this may be a good time to focus on some of the industries that are likely to boast strong growth in this decade.

Sectors that some growth-fund managers are focusing on:

- Health care and biotech. The aging population should benefit many hospitals, drugstore chains, companies providing outpatient services such as oxygen, and providers of pharmacy services to nursing homes and assisted living facilities, said Brian Berghuis, manager of T. Rowe Price Mid-Cap Growth fund, which gained 7.4 percent last year.

Robert Gardiner, manager of the Wasatch Micro Cap fund, up 37.5 percent last year, likes ICU Medical, which makes needle-less intravenous systems. "The world is moving to a needle-less environment," he said.

Meanwhile, though the fruits of the human genome project aren't expected until the latter half of the decade, many biotechnology firms already have "truly revolutionary" drugs in late development or coming to market, Berghuis noted.

Kenneth W. Corba, manager of the PIMCO Growth fund and chief investment officer of the firm's equity division in New York, said PIMCO continues to own several of the more-established names in the biotech, including Genentech and Amgen, both of which are well off their peaks of last year. Corba's fund was off 14.2 percent in 2000.

"We're looking at financials that have a global presence -- asset gatherers with recurring income and strong brand names," said Corba. "They can benefit from two major trends: aging demographics and continuing globalization."

Names he likes include insurance titan American International Group, American Express and Citigroup.

The average financial-services stock mutual fund surged 26.6 percent last year, in large part because value investors bid up such sectors as insurance and regional banks.